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The 2022 stock market correction is still an ongoing affair for many investors. While the FTSE 100 has made an impressive comeback reaching new record highs, the same can’t be said for other indices.
For example, the FTSE 250 is still down nearly 16% from its September 2021 peak. And while its recent upward trajectory may soon close this gap, there remain many bargains for investors to capitalise on today.
Investing in undervalued businesses for the long run is a proven investment strategy that can lead to enormous wealth generation. In fact, that’s precisely how Warren Buffett became one of the richest people alive today. The challenge is differentiating the good from the bad, as well as balancing risk versus reward.
2023 stock market opportunities
One of the easiest ways to capitalise on the eventual recovery of the FTSE 250 would be to simply buy shares in an index fund. But picking individual stocks is the only way to potentially achieve market-beating returns. So what sort of companies should investors be focused on?
The most critical financial aspect of any business is cash flow. After all, companies don’t go bankrupt because they’re unprofitable, but rather because they run out of money. And while the stock market seems to be recovering nicely, the economy is still in a bit of a mess.
The risk of a recession continues to loom over the UK. Recent predictions from the Bank of England suggest its severity won’t be as disastrous as initially anticipated. Yet even a mild recession can still be problematic, especially for smaller businesses.
Assuming the worst, firms with limited financial resources and unreliable cash flow could tumble into hot water within the next few months. And some bargain FTSE 250 stocks today may get even cheaper. That’s why when scouring the index for stock market opportunities in 2023, ensuring resilient cash flow is at the top of my checklist.
The best shares still have risks
Even if an investor successfully identifies the companies with the most robust balance sheets, stable incomes, and the biggest long-term potential, there’s never a guarantee of positive returns, especially in the short run.
As previously mentioned, there remains a lot of economic uncertainty, which has a habit of harming investor sentiment. And in the short term, the stock market is driven by mood and momentum, not financial performance. Therefore, even the best businesses can still watch their valuations suffer.
Fortunately for investors, a few risk management tactics can help mitigate this volatility. One of the most effective and simplest is pound-cost averaging. Instead of lumping all available capital into the stock market in one go, investors spread out their buying activity over several months. That way, if share prices drop, there’s still money available to capitalise on even better bargains in the FTSE 250.
